The Key Is How Fast Folks Turn Bullish
We finally got a rally, but what happens next is not so clear. Let's look at the indicators.
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Note: I am taking a few days off to visit my mother. My next column will be Tuesday morning, March 11th.
At least we got the rally, and we had a few interesting statistics to go along with it.
As I noted in the morning, the whoosh down had far fewer stocks making new lows than we had the prior day. For example, Nasdaq had 688 new lows on Tuesday, but on Wednesday’s morning whoosh, there were only 166 new lows.
Over on the NYSE it was not nearly as dramatic, but then we know the selling has been concentrated on Nasdaq. On Tuesday the NYSE had 289 new lows and on Wednesday there were 97. I don’t want to call it a positive divergence because that would require the indexes to make lower lows and they did not. But no matter what we call it, it was a positive which is why I posted it in the Daily Diary midday Wednesday.
All this selling in Nasdaq has caused the Hi-Lo Indicator to make its way to the top of oversold territory at .19. The NYSE is still at .30 (it gets oversold under .15), but at least Nasdaq has made it there.
The other bit of news, this from the sentiment front, came from the Investors Intelligence bulls falling to 36%. This is the lowest reading since they were at 25% in October of 2022. This too goes on the positive side of the ledger.
The bears rose, but only slightly. They now chime in at 28%. In January they were at 32%. So, while there are still more bulls than bears (unlike AAIII with 4 times the number of bears to bulls), at least this is finally playing catch up to AAII, and the bullish percentage is a plus.
Then there is the Daily Sentiment Index (DSI). It shows us nothing on the S&P or Nasdaq (both in the 40s which is neutral), but the DSI for the VIX is now 76. That is getting extreme. To give you an idea, we have to go all the way back to April 1, 2020, to get a reading for the VIX in the 70s (it was 73 then).
Now if only we could see some movement in the put/call ratios that showed me panic. The put/call ratio was .75 on Thursday which shows me folks are quick to jump on the rally wagon. That is not on the positive side of the ledger.
I am not sure this oversold rally will just zip on upward as so many others have, but even if we give some back, I think we can rally again. As always, the key for me is how fast folks turn bullish during an oversold rally.
One last point, it is too soon for me to determine when we’ll be back to a short-term overbought condition. But it is my view that this is a trading market. I said that at the beginning of the year, and I still think that’s what we have.
